Why Stocks Can Be Better Than Gold

Source:

...Mining stocks, as measured by the Philadelphia Gold/Silver Index (XAU) cranked out an annualized volatility of 34.3% since 2005. Bullion, priced at the London morning fix, churned at a 19.3% rate...

Last week's short-covering rally in gold has the cocktail hour crowd talking bullishly about the yellow metal again.

Deciding which investment route to take to your golden future seems a more daunting a task, though not necessarily a less expensive one, than choosing your libation nowadays.

Some things to consider ...

Gold stock prices are more volatile than the cost of the metal itself, an indication of the leverage built into mining operations. Mining stocks, as measured by the Philadelphia Gold/Silver Index (XAU) cranked out an annualized volatility of 34.3% since 2005. Bullion, priced at the London morning fix, churned at a 19.3% rate. As equities, too, one must account for stock market headwinds or tailwinds. Sometimes, as in the first half of 2006, gold stocks outperform bullion. A year later, it was physical metal that had the edge...

Valuing gold stocks as "overpriced" or "underpriced" relative to gold itself can be accomplished by calculating the ratio of gold's price to that of XAU...

A promising signal indicating a mining stock advantage seems to be three or more consecutive Gold Stock Oscillator readings of 130 or better. XAU was at 80.55 on May 17, 2005, after three such sessions, while gold was fixed at $420.35 in London Within six months, the Oscillator had declined to 103.70, putting XAU at 115.90 and London gold at $480.75. Mining stocks' 43.9% gain clearly trumped the metal's 14.4% appreciation. The miner's advantage actually took another couple of months to play itself out. After three consecutive Oscillator readings below 100 on January 6, 2006, XAU stood at 139.86, up 74.1%, versus gold's 26% gain attained at the $529.50 level...

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